Data shows that Bitcoin has a pattern of seeing a strong correction after open interest in BTC futures exceeds $1 billion.
There was a time when the BitMEX crypto derivatives exchange reigned supreme over other exchanges, and the company had a 50% market share until July 2019. For this reason, traders were aware of all the indicators connected to BitMEX, its financing rate, open interest and base.
The open interest measures the total number of contracts that market participants have. As the number increases, so does the potential size of settlements. On August 2, a $1.4 billion drop occurred when $1 billion in futures contracts were forcibly settled due to insufficient margins.
The price of Bitcoin falls back below $16,900 as the whale deposits rise again
Although there is no magic number, traders tend to freak out when open interest approaches $1 billion, causing a phenomenon that some traders call the BitMEX ghost. This became evident during the second half of 2019, when massive drops in the Bitcoin Code occurred on seven different occasions as open interest reached $1 billion.
The perceived risk associated with a high open interest depends on the liquidity of the underlying asset. During Q3 2019, Bitcoin volume on spot exchanges averaged $2.4 billion per day. Therefore, a single contract totaling 42% of Bitcoin volume seemed important enough.
Bitcoin price vs. open interest in BitMex perpetual contracts (in USD) Source: TradingView
As we can see in the graph above, there is no doubt that the open interest of about USD 1 billion coincided with the price falls from July to September. It is worth noting that a considerable number of contracts at stake cannot be considered bullish or bearish.
The second half of 2019 was mostly bearish
The second half of 2019 was quite tough for cryptomonies, and as most investors will remember, even President Trump publicly charged against Bitcoin, as reported by Cointelegraph. All this happened while the Secretary of the Treasury of the United States, Steven Mnuchin, demanded more regulation and supervision for the sector.
Open interest in Bitcoin’s future aggregates in November 2019 (in USD)
The chart above shows in much more detail how relevant BitMEX’s 40% market share was at that time. One single exchange had an open interest equivalent to half of the daily Bitcoin spot volume.
CME surpasses OKEx as the largest Bitcoin futures market
Fast forward to 2020, BitMEX has been dethroned by OKEx, where total open interest on perpetual and fixed-month futures exceeded $1 billion on July 25.
Open interest in Bitcoin aggregate futures (in USD). Source: Skew
The rest of the contenders continued to increase their participation, but only recently the Chicago Mercantile Exchange (CME), Binance and Bybit managed to break the psychological barrier of USD 1 billion.
The current market is marginally similar to that of 2019, but with less risk
Interestingly, this happened on November 20, just four days before the 16% drop to USD 16,334. The total open interest of futures in September 2019 amounted to USD 3 billion to put things in perspective. This time, four exchanges were able to break the $1 billion barrier.
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Although open interest in futures rose to $7.4 billion, so did the average daily volume on spot (regular) exchanges, where the figure is now $3.5 billion. Therefore, unlike last year, the fact that a single exchange has an open interest of $1 billion should not surprise us in the same way as it did in 2019.
In short, the markets have grown and developed to the point that the BitMEX ghost has disappeared, but it could have been replaced by a similar phenomenon that occurs when four exchanges cross the $1 billion open interest mark in futures.